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What Next?

If additional safeguards are enacted into law to protect consumers from predatory payday and title lending, some of the current lenders will likely move out of the state, claiming that new regulations are driving them out of business. This is beneficial to the community and inevitable when additional protections are established. Encouraging responsible lending will necessarily entail getting rid of the lenders that are unwilling to extend loans with terms that are fair to consumers.

If these lenders leave the state or become less available, low-income consumers will still have options at their disposal to deal with financial shortfalls. Many creditors will negotiate payment plans with borrowers. Also, borrowers may turn to friends or family for help instead of taking out a loan, which is something that many already do to escape predatory loan debt. Additionally, if these loans were not available, many borrowers would simply cut back on expenses.

In a July 2012 study based on a survey of payday loan borrowers, Pew Charitable Trusts found that most would choose options that do not connect them to a formal institution if payday loans were unavailable. In the Pew survey, 81% said they would cut back on expenses; 62% said they would delay payment of their bills; 57% said they would borrow from family or friends; and 57% said they would sell or pawn personal items. Only 44% of consumers would get a loan from a bank or credit union; 37% would use a credit card; and 17% of employed borrowers would get a loan from their employer.34

North Carolina’s experience confirms these findings. In 2001, state legislators allowed laws that permitted payday lending at high interest rates to expire. Five years later, the attorney general reported that the last of the payday lenders in the state had agreed to stop making illegal loans.35 In a 2007 report commissioned by the Office of the Commissioner of Banks, survey responses and focus groups showed that the absence of storefront payday lending had no significant impact on the availability of credit for households in North Carolina. The most frequent options used by those facing financial shortfalls were paying the expense late or not paying, using money from a savings account, and obtaining money from friends or family.36

Eliminating predatory lending products also allows responsible lenders to enter the market. From 2002 to 2006, the first four years that loans with annual interest rates above 36% were banned in North Carolina, there was a 37% increase in the number of loans made at or below 36% APR.37 The North Carolina State Employees Credit Union, the biggest in the state, created an alternative payday loan product with an annual interest rate of 12% and a savings plan.38 Similarly, after the Military Lending Act of 2007 limited the interest rate for loans extended to active-duty military personnel and their families to 36%, non-profits and military relief societies began offering interest-free loans.39 Many military credit unions and banks also began extending loans at low interest rates or with zero interest.40

A pilot program conducted by the Federal Deposit Insurance Corporation also established a “safe, affordable, and feasible template for small-dollar loans.” Charge-off ratios, which represent the amount of debt the bank believes will never be recovered, were in line with the industry average. Most pilot bankers indicated that small-dollar loans were a useful business strategy for developing or retaining long-term relationships with consumers.41

Already, many credit unions in Alabama offer 90-day loans at annual interest rates of 18% or lower. These credit unions will offer loans to borrowers with no credit or bad credit, requiring only that they are members of the credit union and can provide proof of income or direct deposit. If additional protections are enacted into law, other banks, credit unions and community organizations will step in to offer safe products to meet the demand for small-dollar loans.

Policymakers must regulate both payday and title loans to protect consumers from predatory lenders. Otherwise, Alabama lenders, many of which are engaged in both payday and title lending, will simply push their customers to take out whichever loan is more favorable to the lender under the new regulatory structure. Other states have seen this reaction to increased regulation. For example, in Arizona, when the payday loan law expired, more than 200 payday lenders filed licenses to operate as title lenders and encouraged their customers to shift to these loans.42 In Virginia, the number of title loans increased five-fold between 2010 and 2011 after restrictions on payday lending took effect in 2009.43 Policymakers must take a strong stand on protecting vulnerable communities by addressing both types of predatory loans.